A New Zealand Ponzi – the final outcome of McIntosh v Fisk

The second report of the NZ insolvency working group had deferred consideration of the application of the voidable transactions regime under the Companies Act and the prejudicial dispositions regime under the Property Law Act pending a decision of the NZ Supreme Court.  That decision has now been given, on 26 May 2017, confirming the Court of Appeal and trial decisions: McIntosh v Fisk and Bridgman [2017] NZSC 78.

The circumstances involved an investor – McIntosh – who put funds of $500,000 into what was a Ponzi scheme (his funds were misapplied for other purposes) but he obtained payments totaling $954,047 before the collapse of the scheme.

That was the amount to which he was purportedly entitled according to the fictitious financial reports he had received.  The additional amount of $454,047 was said to have been earned on his portfolio in the 4 ½ years from the time of his initial investment. In reality, the investments did not exist and the money paid to him was not derived from their sale. Nevertheless, as with other investors, McIntosh was led to believe that his portfolio was increasing in value and yielding an attractive rate of return.

The ultimate finding was that the fictitious $454,047 was recoverable by the liquidators, but not the $500,000.

New Zealand’s relevant defence under section 297(2)(c) of the Companies Act 1993 “A gave value for the property or altered A’s position …” is based on Australia’s s 588FG(2)(c) “the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction”. While the working group deferred dealing with the question of value pending the Supreme Court decision, it raised an option of amending the law to confirm that the ‘gave value’ element of the defence is not satisfied by receiving fictitious profits, subject to the good faith and change-of-position defence.

Another option raised was to adopt US style provisions in the form of a ‘Ponzi presumption’ to establish that Ponzi scheme investors are creditors without needing to prove an intent to defraud, or to prove the debtor’s insolvency; and to impose an objective standard for the good faith defence where a Ponzi scheme is established.

But as the report says, there are ultimate difficulties in defining what actually constitutes a Ponzi scheme. The transfer of incoming receipts from new investors to meet outgoings due to on-going investors, from which Mr McIntosh benefited, can also be a feature of a failing company immediately drawing on cash flow receipts to pay debts.

The working group will no doubt conclude its recommendations now that the Supreme Court decision has been given.


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